Thursday, October 22, 2015

Using a Business Credit Card in Place of a Small Business Loan

Throughout the course of a small business’s life, there will almost always come a moment when the owner is plagued with answering a very, very difficult question: “Should I get a small business loan?”

This question can come about for a number of reasons, whether the business owner has hit a cash crunch, needs capital to pursue a specific business opportunity, they’re looking to expand, etc. No matter the reason, it’s never easy to decide if debt is the solution.

In these situations, you should perform a cost-benefit analysis, ensuring that your total cost of incurring the capital (APR, origination fee, closing costs) is less than what you stand to gain from the investment.

If you’ve decided “Yes,” my business needs financing to achieve its goals, your next step is to find the best product for your situation.

There are numerous products available to business owners, from bank loans to SBA loans to invoice financing. But, one product that business owners tend to forget to include in their comparisons? Business credit cards.

It’s a hot topic — are business credit cards a good source of funding for small businesses? Many people will tell you, without pause, “NO!” But, to be honest, it’s not necessarily that simple. There are many situations in which a business credit card should be considered an option, and some situations in which it is hands down the best option.

Here are 3 instances that business credit cards can be just as good of an option, if not better, than asmall business loan.

1. Charge Cards

Let’s use this example:

You’re a strawberry farmer in California. You do good business, as your strawberries are the absolute tastiest (bravo). However, you just got a huge, unexpected order from Driscoll’s. They need the order fast, but it’s so large you don’t have the cash flow to get it done. So, you consider taking out some financing to make it happen. Here’s the thing — you’re a rockstar borrower. Great credit score, strong revenues, good cash flow. Where do you go for a loan?

Well, you’re obviously bankable, but you need the money in a matter of days to make this happen, and you know that working with a bank will take weeks if not months. If you already had aline of creditat your bank, this would work perfectly, but, unfortunately, you do not. So, you decide to try online lending. You know that the options will be pricier, but you plan on paying off the debt as soon as Driscoll’s pays you. But, as you start to shop, you get sticker shock from the APRs you’re seeing. As a top-tier borrower, you refuse to consider anything that doesn’t have single-digit interest rates. And, yes, you plan on paying it off early, but the fact is you’ll stay have to pay some interest, and some of these products have prepayment penalties.

This is where charge cards come in. If you need money upfront to make a business deal happen, and you know you’ll have the cash to pay it back in a matter of weeks, then this is a serious source of financing to consider.

For example, take American Express’s businesscharge cards. With their charge cards, there is no pre-set spending limit, so you don’t have to worry about being approved for a certain loan amount. You’ll get the amount you need to get the job done. All you have to do then is to pay the balance in full by the end of the month. Or, you can look at the Plum card specifically, which gives you 60 days to pay (and even gives you anincentive if you pay early). The Plum card, however, will have a spending limit.

The plus side, outside of what is essentially an interest-free 30-day loan, is that you can be earning rewards and building your business credit at the same time.

When do charge cards not make sense?If you don’t feel you could confidently pay off the balance at the end of every month, then a charge card is not for you. Having strong business cash flow is essential to take on this product.

If you need cash fast, and are confident you can pay back the debt in 30 days, charge cards might be the most practical financing solution for you.

2. 0% Introductory APR

If you’re like most people and constantly get credit card offers, chances are you’ve received a couple that have offered you 0% APR on purchases (and maybe even balance transfers) for a set period of time. Two examples are the Capital One Spark Cash Select for Business and the U.S. Bank Business Edge Platinum. Both of these business credit cards have 0% introductory APR on purchases, and U.S Bank’s includes balance transfers. Capital One’s introductory period is for 9 months and U.S. Bank’s is for 12 months.

These cards are great for financing, and help extend the time you have to pay. Let’s say you need to make an upfront purchase, but know that you’ll need closer to 5-6 months to pay it back. With these cards, you can make the purchase with the card, and use the 0% APR period to slowly pay it off. Obviously, the credit line will need to be large enough to cover the expense. Also, you’ve got to make sure you pay the debt down before the APR kicks in.

The hardest part about this type of financing is self-control. Let’s say you took out that card with a very specific purchase in mind, perhaps a new oven for your pizzeria. But, knowing the card has 0% APR, you start to slowly add on other expenses, until you have a mound of debt you can’t pay back before the APR kicks in.

Second, you might want to be cautious if you already have other business credit cards. If you plan on closing one of your current lines to make room for the new one, you could end up hurting your credit score. Not to mention, having multiple credit accounts can get confusing. Therefore, this is usually a good option for business owners who have none or only 1 business credit card. And, make sure to find a card that has great benefits even after the introductory period, so you can keep using it and keep building your business credit.

3. APR is Less than Your Loan Offer

When business owners are looking at medium orshort-term loans, which can have double digit APRs, they start to wonder if it makes more sense to use a credit card to finance their business. And, in some cases, the answer is yes. If the APR on your current credit card is less than what you’re offered from a lender, it could very well be a better option.

First of all, you need to make sure your limit allows for you to cover the cost of the financing, as well as other daily expenses you tend to use the card for. This might make it a non-option out the gate.

The other thing to think about, and this also applies to the two scenarios above, is that credit cards can’t be used for everything. Perhaps you need cash or you need to buy a large piece of equipment but the supplier doesn’t accept credit cards.

Lastly, credit card debt can be a lot easier to get wrapped up in (skip a payment here or there), than with automatic debits for a short-term or medium-term loan. You have to understand that if you’re not careful, you could end up building up more debt for yourself in the end.

Financing your business with a credit or charge card is absolutely an option, but it’s about knowing the best solutions out there for this very function. Be diligent, compare all your options, and make sure your choice is something your business can easily handle financially. You’ve got to be incredibly responsible when you use a credit card for financing, so make sure the choice is well-thought through.